Tuesday, December 8, 2015

TTIP and the crisis of financialized capitalism, or: cornucopia for some instead of prosperity for al

TTIP and the crisis of
financialized capitalism; or, cornucopia for some instead of prosperity for all

What the bourgeoisie therefore produces, above all,
are its own grave-diggers.

Its fall and the victory of the proletariat are
equally inevitable.

– Karl Marx & Friedrich Engels, Communist
Manifest, 1848

The 11th round of negotiations has
ended, the 12th is due somewhere early 2016. If formal announcements are
anything to go by, 'jobs and growth' is no longer the slogan with which the
European Commission tries to sell an increasing skeptical audience its push for
a new trade treaty with the US, better known as the Transatlantic Trade and
Investment Pact (or TTIP for short). The assumed benefits have of recent become
predominantly geopolitical, while the feared costs in the form of lower
standards and loss of sovereignty through secret arbitrage courts are
increasingly addressed by European negotiators. Under the reign of viceroy Malmström,
which began in October last year, transparency has become the key word. In a
desperate attempt to regain the trust of the European electorate, Malmström has
insured that her claims that TTIP will not lead to deteriorating consumer
protection (gmo, chloride-cleaned chickens, Round-up, etc.) nor to loss of
sovereignty can actually be checked on her website where most of the relevant
documents (though not all and not in full) are regularly (albeit with a delay)
published.

But in a post-democratic context
it is the positive meme that matters. And that story has radically changed
since the appointment of Malmström as commissioner in the new Juncker-led cabinet.
Whereas her predecessor, the arrogant Karel de Gucht, strongly emphasized the
economy as the key beneficiary of TTIP, Malmström has gradually shifted towards
a geopolitical storyline. Apparently, the deconstruction by NGOs and academics of
the many economic reports that the European Commission had lined up to back its
story of long term economic gains has effectively destroyed any aura of
certainty around the earlier economic claims. While the battle of the econometric
models, due to the uncertainties surrounding their main variables and
correlations, was not won conclusively by either of the two camps, it did at
least succeed in demolishing the absoluteness and hence the usefulness of those
claims for political purposes.

So the second defense line has
now become a geopolitical one. The story goes like this. The rise of China and
India (Brazil and Russia having disappeared from the BRIC) will over time erode
the market-making powers of the US and the EU. To constitutionalize their
current hegemonic positions in the field of product and process
standardization, regulation and global governance, TTIP provides the EU and the
US with an excellent and unique opportunity to determine the rules of the game for
the long term future and will hence give American and European multinationals
corporations crucial competitive advantages over their emerging competitors. What
is at stake here is the infrastructural power of the West, in Michael Mann's terminology.

As DeVille and Siles-Brügge have
argued in their excellent book on the discourse of TTIP, this narrative depends
crucially on the 'mode of regulatory cooperation', as they call it, that will result
from the negotiations. The authors distinguish four such modes. The first one
is full harmonization, meaning that
the EU and the US will decide on a new set of market rules which will fully
harmonize product and process requirements in the two markets. The model here
is the Common Market, which is partially still under construction. Given the
costs involved (both parties will have to completely overhaul their existing
market infrastructure), this outcome is not in the cards. Instead, the
negotiators aim for the less ambitious (and less costly) mode of mutual recognition, basically accepting
each others markets rules as if they are functionally equivalent. It comes in
two tastes, substantive recognition
and procedural recognition. The first
refers to the mutual acceptance of regulatory standards, whereas the second
merely requires that two products have been similarly tested even though the
standards may differ. Finally, the regulatory standards can be either applied ergo omnes, meaning applicable to all (both
insiders and outsiders), or bilateral,
in which case outsiders still face the hurdle of double testing.

As the figure above indicates
there is a tradeoff here. The more substantial the outcome, the higher the
chance that TTIP will set the global tone. And vice versa, the less ambitious
the outcome, the less likely it is that it will become the global standard.
Judging on what is known about the negotiation results, the most probable
outcome is a combination of mutual recognition of standards in some sectors and
of procedures (conformity testing) in others. Contrary to the official
storyline, this will not add up to global standards. And will hence not ensure
the perpetual hegemony of the West – it's stated aim. In fact, as DeVille &
Siles-Brügge stress, it may well be perceived as unfair competition by non-Western
firms, resulting in future backlashes that could hurt EU and US interests
rather than benefit them. Or may incentivize outsiders to establish competing
standards. The flip side, of course, is that the fear of NGOs and citizens that
TTIP will imply a race to the bottom in terms of product regulation, is
overblown too. As was the case with De Gucht's 'jobs and growth story', the 'global
standards story' too is at the end of the day a tale of much ado about nothing.
TTIP is neither going to set global standards, nor is it going to result in a
race to the bottom.

Does that mean that NGOs and
citizens can rest in peace and trust Malmström and her sherpa's on their blue
eyes to do the right thing? Definitely not. Product standards, consumer safety
and national sovereignty is not all that is at stake here. The real issue is
that capitalism is currently not working for citizens and TTIP is only going to
make that worse. In a nutshell: workers are not consuming because they do not
earn enough, while firms are not investing although they earn so much. With
only slight exaggeration one could say that we are in the midst of a deep
underconsumption/overaccumulation crisis that has been going on for the best
part of three decades now. So it clearly antedates the Great Financial Crisis
(GFC) and ultimately caused it. Since the GFC heralded the end of the
debt-driven-real-estate-inflating growth model that many economies since the
early 1990s had been experimenting with (the Netherlands included), the GFC has
ripped apart as it were the veil of wealth that had kept the underlying crisis
conditions from view. This is the key exhibit.

It comes from a 2012
ILO-commissioned paper written by the political economist Engelbert Stockhammer
and gives the share of GDP that is paid to workers in three countries (Japan,
US and Germany) as well aggregate figures for high-income OECD countries (Advanced)
between 1970 and 2010. What it shows is that workers have increasingly been
drawing the short end of the stick and have taken home less and less from the
value added they annually produce, implying that ever more ends up as profit
and dividend in the silk lined pockets of managers and shareholders. The share
of GDP that is being paid out as wages in the West (including Japan) has
dropped gradually but inexorably from a little over 75 percent to 65 percent.

The effects have been huge and
dismal – and, due to a crisis that ended the narcotics of real estate bubbles ­–
now threaten to do seriously harm to the legitimacy of global capitalism, as is
reflected in electoral flights away from the 'extreme' middle that has acted as
the main cheerleader of globalization, the public outcry over corporate tax
evasion as well as migration, and a flurry of authors, covering the full
political spectrum, who have written about capitalism as being for the few, not
the many. A couple of simple, straightforward datapoints may serve to
illustrate the perverse outcomes of financialized capitalism:

·Real average
hourly wages in the US have flatlined; while a worker earned $ 18.76 per hour
in 1972, in 2011 hourly wages were more or less the same: $ 19.47;

·Real
disposable household income in the Eurozone too has flatlined: in Spain they
increased between 2000 and 2013 with five percentage points, in France with 15
percentage points, and in Germany with ten percentage point, while in Italy and
the Netherlands they declined with ten and five percentage point respectively
(see figure below);

·Reflecting
the anesthetics of what is called privatized Keynesianism, gross household debt
expressed as a percentage of disposable income has skyrocketed, especially in
places like Denmark and the Netherlands, where wage moderation to aid the international
competitiveness of the export industries has been offset with the wealth effect
of debt financed real estate bubbles (see figure below);

·Global
corporate profits, squeezed in the late seventies, have recovered across the
board in the 1980s and 1990s, and have maintained momentum, despite the Asian
debt crisis of 1997, the ICT bubble and 9/11 in 2001 and the Great Financial
Crisis of 2007/8;

·Corporate
investment is at an all time low, reflecting the combined pressures on disposable
income of consumers of a wage squeeze (see above), a deleveraging squeeze
(since the Great Financial Crisis) and a tax squeeze, as workers have been
forced to fill the hole blown in the balance sheets of states by insolvent
banks through tax hikes and cutbacks ('austerity') while large firms, through
tax evasion on an industrial scale, largely duck their tax responsibilities;

·Multinationals
sit on unprecedented cash reserves, to the tune of $ 3.16 trillion, most of
which is being kept in tax havens like Ireland, Luxembourg and the Netherlands,
and is increasingly invested in money market funds, which play a key role in
the global shadow banking system that provides day-to-day funding to the large
global banking conglomerates;

·Mergers and
acquisitions, partially in the form of infamous 'inversions' meant to shift
headquarters to low tax jurisdictions without paying 'exit taxes', have again reached
record levels; so far 2015 has seen $ 4.2 trillion worth of M&A's,
generating handsome rewards for investment bankers, and are on course to breach
again the former, 2007, record (see figure below) (of course, academic research
has time and time again demonstrated that most M&A's are value destroying,
rather than value creating);

·Share buy
backs – another popular destination for corporate cash reserves – have also
reached record levels after the GFC; the aggregate value of share buy backs of
firms included in the S+P 500 is due to reach approximately $ 1 trillion, again
breaking the earlier record, that of 2014 (sic!);

·The result
is rapidly increasing income inequality in a growing number of OECD countries,
reaching again levels that were last seen in the beginning of the 20th century,
reversing decades of increasing equality due to war, destruction,
expropriation, the success of the redistributive welfare state and politically
enforced progressive taxation, as Piketty has so powerfully demonstrated in his
2014 bestseller (see figure below).

Capitalism has again become
a giant exploitation machine. Slurping up value by the rich and powerful is again
its modus operandus, instead of trickling it down upon the poor and vulnerable,
as the legitimating neoliberal narrative would like to have it. Prosperity for
all has been replaced by cornucopia for some. The academic literature provides
four broad explanations for this sorry state of affairs: skill-biased
technological change, retrenchment of the welfare state, globalization and
financialization. The first and most popular suggests that technological
innovations has made the production of goods and services more knowledge
intensive and has hence put a premium on (the small contingent of) workers with
more human capital while workers with less human capital (the largest contingent)
see their wages shrink. Its popularity is easy to understand: first because it
is based on a meritocratic worldview in which each gets what (s)he deserves
given his/her merit and second because the remedy is more and better education
for all – a no-brainer for both the left and the right.

The second suggests that due to
decreasing employment protection, the costs of hiring and firing has declined,
resulting in more job mobility, more labour market competition and hence
downward pressures on wages. Globalization has a similar effect due to the
increased ability of employers to outsource and offshore activities to low wage labour
markets or jurisdictions. Finally, financialization works through the
increasing dependence of firms' profits on financial engineering and financial (and
fiscal) arbitrage. As productive employment starts to become less relevant for
firms, the internal allocation of resources becomes increasingly biased towards
workers with financial skills, resulting again in a redistribution of value
added away from average workers. The popularity of these latter three
explanations, especially among the mainstream trained economists that people
the government buildings in Washington, Brussels, London and Amsterdam is
noticeably less, due to their emphasis on power, recourse inequalities and rent
extraction, 'things' that do not loom large in the universe of neoclassical economics.

A growing number of academic studies
have recently confirmed that skill-biased technological change has less
leverage on the story than earlier thought. In fact, in a recent blog for the
New York Review of Books, Paul Krugman declared the story as good as dead: 'In short, a
technological account of rising inequality is looking ever less plausible, and
the notion that increasing workers’ skills can reverse the trend is looking
less plausible still.' Instead most
of the explanatory power comes from the other three stories. Welfare state
retrenchment together with globalization and, especially, financialization
explain well over six of the 10 percentage point drop that the average wage
share has experiences between 1970 and 2010, as the figure below from the same Stockhammer
paper clearly illustrates.

What this is all about is a
radical shift in the power balance between organized capital (large employers
and employer organizations) and organized labour (trade unions). Confronted
with a huge profit squeeze in the late 1970s, states in cahoots with well
positioned business elites have forcefully pressed for a series of rule changes
which have radically weakened the bargaining power of trade unions. Both
welfare state retrenchment (read: decreasing employment protection) and the
deregulation (and later: harmonization) of market rules, which is what
globalization is all about, have contributed to the erosion of labor unions on
the hand and the extension of the exit options of organized capital on the
other.

The gradual erosion in disposable
income at the level of households and of effective demand at the level of
national economies and regions that this caused, has next seduced firms to
dabble in financial engineering (share buybacks, playing the financial markets,
increasing leverage) and fiscal arbitrage (using transfer pricing, interest
rate deductibility and discrepancies between tax systems to minimize the
effective tax rate), redistributing value away from line workers to rent
extractors in the head office.

This is what is at the core of
the underconsumption/overaccumulation crisis that has again been laid bare by
the Great Financial Crisis. At root it is a crisis of asymmetrical bargaining
power, whose resolution either requires shoring up the power resources of organized
labour or diminishing the exit options of capital through capital controls or
other instruments that limit the mobility of capital. TTIP is doing neither. In
fact, by constructing an even larger common market, TTIP may be expected to do
the reverse. That is why it should be opposed. Not only by progressives,
xenophobes and anti-globalists. But also by conservatives, neoliberals,
libertarians and even capitalists. If only to save capitalism from itself.

2 comments:

Capitalism should be stopped, I Agree, it is the mother of all evil! Thank you for your excellent explenation and usefull insights in this very dificult matters and "not for the faint of hart" who like to see how economic thruth is written.